“Profitability is not only about pricing and cost”
Cash flow and working capital are often forgotten in our P&L focused world. The level of working capital a company carries compared to its peers can give insights into how efficient the company’s core processes are.
– A delivery process that focuses on quality and shortening lead times is more agile with less inventory.
– A design process that manages the ramp up and ramp down phases well will cause less obsolete inventory.
– A sales team that truly knows what the customer wants will cause less deviation in production and less need for speculative inventory buffers.
The secrets behind improving working capital
So why is it often difficult to substantially improve the level of working capital? In our projects, we see three major reasons.
- There are myths living in the organization that are not being challenged. Have you ever heard someone say, “We need to carry high inventories to serve our customers”? Sometimes this is true, but too often companies keep high stock on obsolete products, while facing shortages on the products customers truly want.
- Another reason is that the core processes affecting working capital are cross functional, but people work in silos focusing on the own part of a process regardless of the effect on the process outcome.
- The work in silos is supported by function specific KPIs, like unit cost in production instead of production throughput.
Through identifying and attacking the actual root causes for the current state, working capital can be optimized sustainably. We at Capacent believe that by combining the facts identified in an analysis phase with cross functional working capital training, tools, best practices and individual coaching we can break the old myths in favour of insights and new ways of working.
The cultural change can take some time but will have a clear positive impact, not only on working capital but on EBIT as well. Waste is reduced both measured as material but also as time utilization among key persons. Companies with efficient processes have less inventory write-downs and credit losses.
Decreased by almost 100%
The project industry can be mentioned as an example. When structuring and tightening the order to delivery process with control points that ensure all needed tasks are completed before the project can enter the next phase, both targeted margin and cash flow are managed and secured.
In one project, orders were not released for production before the advances were paid and after a certain point no deviations were made without a price tag and delivery time impact. This, among other actions within the project, decreased our customers’ working capital by almost 100%, taking it close to being negative.
Here you can read more about working capital management The Nordic way.